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Finance

Overview of US Gulf Coast 3:2:1 Crack Spread

Crack spreads represent the price difference between refiners’ revenue, derived from the sale of finished refined products, and refiners’ costs or the price of crude oil (USO). So they’re an important metric that drives refiner profitability and market valuation. This is something investors in refiner stocks should watch.

A narrower crack spread lowers the profit margins of refiners like Valero Energy (VLO), Phillips 66 (PSX), Marathon Petroleum (MPC), and Tesoro (TSO). They would have to purchase raw materials or inputs at a higher rate. Conversely, wider crack spreads tend to raise profit margins for refiners. Together, these companies account for ~12% of the Energy Select Sector SPDR ETF (XLE).

The above companies spun off some of their midstream assets to form Valero Energy Partners (VLP), Phillips 66 Partners (PSXP), MPLX (MPLX), and Tesoro Logistics (TLLP). These are all midstream MLPs. A narrower crack spread would indirectly hurt these companies. The lower volumes produced by their refining parents in response to higher input costs would mean less volume to transport. This could hurt the MLPs’ revenue. For more on crack spreads, please read Crack Spread 101.

For the latest updates on the energy sector, please visit Market Realist’s Energy and Power page.

View more information: https://marketrealist.com/2015/10/overview-us-gulf-coast-321-crack-spread/

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